What does it take to get private equity from venture capitalists?
VCs provide startups with vital capital. Your startup can use the funds to scale operations and recruit top talent.
Cybersecurity companies compete with each other for limited private equity. These companies must also convince VCs to invest their hard-earned money.
Venture capitalists know cybersecurity investing presents a compelling opportunity. Forecasts project cybersecurity will become a $170 billion industry this year.
You don’t have to convince them about the importance of cybersecurity. Instead, you must convince VCs that your company can dominate the industry.
We can help your cybersecurity startup get venture capitalists’ attention. These strategies will help you obtain private equity from VCs.
Private Equity Loves Returns
Venture capitalists can invest in many startups. They may have dozens of startups reaching to them at any given moment.
These venture capitalists could put their money into stocks and real estate. However, private equity in startups provides the highest upside.
Venture capitalists will forgo safer investing strategies to pursue high returns. However, they won’t get to see their initial investment for several years.
Venture capitalists only give private equity to cybersecurity startups with potential. They want a 10x return from their investment to compensate for failed ventures.
You must demonstrate how your business can expand its market share. Share revenue growth numbers so an investor can see your startup’s growth over time.
You can’t maintain high revenue growth rates forever. As companies mature, their revenue growth decelerates. VCs hope to invest in startups that can produce robust revenue growth for many years to come.
Some venture capitalists invest in certain causes. However, they all invest with the intent of multiplying their proceeds.
Venture Capitalists Look at the Founder
High-growth startups come with significant potential. These companies can tap into emerging markets and quickly gain market share. They may solve significant problems in the world.
Management can help the startup realize its potential or sink the ship. A company’s impact is directly tied to leadership.
The top companies on the planet have reliable founders. These founders made decisions and oversaw implementations that yielded significant appreciation.
Some cybersecurity startup owners only pitch the company to venture capitalists. However, they must also pitch themselves and management.
Attracting experienced leaders from other vibrant cybersecurity companies will strengthen your pitch. Many businesses poach top talent from competing companies to gain an edge. You don’t have to poach top talent, and some VCs will frown upon the practice.
However, you should carefully consider the team you build. Don’t be afraid to spend extra money on executives who can steer your company on the right path. VCs will be impressed by your team and invest private equity into your company.
VCs Want to Know How you Will Use Their Money
Venture capitalists won’t see their money for several years. However, they know you will get immediate access to their private equity.
A cybersecurity startup can spend the money in any way it desires. The startup can invest in ads, new hires, software enhancements, and other costs.
Venture capitalists want to know all of the details. They want to know how you will generate a profitable return from their investment.
During your pitch, explain why you need private equity and how it would help your business. Venture capitalists will look for reasonable cash management.
VCs know your business is unprofitable at the moment. They want to see your losses aren’t too drastic. They want to know you’ll use their money to grow the business instead of struggling to stay afloat.
How Is Your Cybersecurity Startup Different?
Venture capitalists receive several requests about their private equity. They receive requests from various startups across several industries.
A venture capitalist may have to choose among several cybersecurity startups. Some venture capitalists only want to invest in a single cybersecurity startup.
Cybersecurity startup founders must explain why they are different from the competition. Do you specialize in software, cybersecurity training, or something else?
More companies have jumped into cybersecurity, and some are already established.
Initially, you will compete with smaller cybersecurity companies. However, venture capitalists have big dreams for their investments.
You should explain how you can compete with the largest players in the market. As your company grows, those top corporations will be your competition. Some cybersecurity startups already directly compete with those businesses.
VCs want to know if you can maintain strong growth rates while competing with leaders. They want to invest in innovative cybersecurity startups instead of cookie-cutter companies.
Address the Risks
No startup is perfect. Your slide deck can make your company seem like the next big idea. Venture capitalists can see the dangers in the way of the fantasy.
They have heard many founders explain how their company will become a top player. Not all of those promises come to fruition.
Venture capitalists know the risks of your industry. They also expect you to address risks and how you will overcome them.
Private equity comes with significant risks. The underlying company further amplifies that risk.
The high risk indicates venture capitalists are not afraid to incur significant risks. However, they must feel confident about your ability to navigate company risks.
Present a Convincing Valuation
Venture capitalists will review your company’s valuation before making an investment. Unrealistic valuations will immediately get dismissed.
Cybersecurity startup founders must strike the balance of a fair valuation. The valuation must keep VCs interested without giving founders the short end of the stick.
Use the valuations of other startups as your guide. You can price yourself competitively and use revenue as guidance. Some companies trade at 10x sales while others trade at much higher multiples.
Your company’s potential and addressable market both influence the valuation. Review other cybersecurity startup companies to identify the right valuation.
When making your pitch, explain how you arrived at your valuation. Compare your valuation to other companies so VCs know they’re getting a great deal.
If you use a higher valuation, justify it to the venture capitalist. They will look for momentum and a proven concept to justify the valuation.
Realistic Financial Projections
Venture capitalists invest because of what your startup can become in a few years. Financial projections help them see your company’s potential.
Realistic and exciting financial projections will lead to more private equity. Venture capitalists want to see extraordinary revenue growth to justify their risk.
However, they can spot a fake. If your company achieved 40% revenue growth, don’t say your company will achieve 500% revenue growth the following year.
It’s better to be truthful to a venture capitalist and adjust your valuation accordingly. You can use their equity to achieve higher revenue growth rates. Higher rates will help you raise the valuation for future private equity investors.
Give a Product Demonstration
Financial numbers and the business model help VCs understand your startup. Numbers and business models do not give them sufficient background to make an investment.
Venture capitalists will only invest in what they understand. These investors have endured heavy losses and dramatic gains. They have years of experience and are less prone to beginner mistakes.
Include a product demo in your pitch to give VCs clarity about your business. Seeing the product in action will help them understand how your startup helps customers.
Show your product’s features, and gather customer testimonials. This part of your pitch helps venture capitalists see the problems your startup solves. Let them understand why your startup has a reason to exist.
What Is the Barrier to Entry?
Companies frequently steal from each other. Corporations with more funds can copy a fledging company to oblivion.
We saw how Twitter’s Periscope shut down Meerkat overnight. People also followed Instagram’s changes closely as they sought to mimic Snapchat and Vine.
Other cybersecurity companies will try to replicate your business model. What’s stopping them?
Venture capitalists will feel more confident if your product has a high barrier to entry. Some companies will skip the trouble and acquire the company instead of trying to replicate its offer.
An acquisition can help venture capitalists realize a profit sooner. Some private equity investors like companies that can become acquisition targets in the future.
Get Private Equity for Your Startup
Private equity can change the trajectory of your cybersecurity startup. You’ll suddenly get extra funds that you can deploy into your business.
We can help your cybersecurity startup with getting private equity. Contact Option3Ventures today to discuss your cybersecurity investing needs.